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Judgments - July 6th 2017 - Bank’s duty of care

This case concerns the scope of the duty of care owed by a lending bank to a retail customer. The borrowers, Mr and Mrs Thomas, who were partners in an organic farming business, switched some of their indebtedness from a variable to a fixed rate basis, for a term of 10 years. They alleged that the bank had misrepresented, or at least not adequately explained, the financial consequences which would follow if they tried to get out of the fixed rate before the expiry of the 10-year term.

Judge Havelock-Allan QC found it significant in this case that the bank had advertised to the borrowers that it subscribed to the Business Banking Code (BBC). The BBC contained a fairness commitment, including a promise that, if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of its financial implications. There were no disclaimers, “basis” clauses or exclusions in the terms and conditions which applied between the claimants and the bank that would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise. In the circumstances, the judge found that, when the claimants enquired about fixing the interest rate on their borrowing, the bank owed them more than a duty not to mislead or misstate.

Rather, the bank had a duty to explain the financial implications of fixing the rate, in response to the claimants’ enquiries. It was not a duty to volunteer information if not asked. What was required was an explanation in plain English of what fixing the rate entailed, and the consequences of such a decision. The bank was obliged, in the opinion of the judge, to provide an accurate description of how the agreement would operate in the event of an early repayment. A worked example was not necessary, but the ingredients of the calculation under each clause should have been made clear in terms which gave a balanced picture. In particular, the claimants should have been told that the earlier they repaid the loan during the fixed term the higher the redemption penalty might be. The judge termed this “the information duty”. The information duty obliged the bank to follow the best practice set out in the BBC.

On the facts, the judge found that the borrower had told the bank that it seemed prudent to fix for 10 years and that in response Mr Price, who was a senior manager in the bank’s food, farming and trade team, agreed. While the judge had some sympathy for Mr Price in this situation, because Mr Thomas was inviting endorsement of his view, the judge came to the conclusion that Mr Price probably did say something which conveyed to Mr Thomas that he was sensible to think of fixing for 10 years rather than five years or two years, because the 10-year rate was lower. Although Mr Price’s statement did not cross the line between information on the one hand and advice or a recommendation on the other, it would have been misleading, and would have amounted to a misrepresentation because it only told half the story. Even if it was not a misrepresentation, the judge was in no doubt that it amounted to a breach of the information duty which the bank owed to the claimants. The judge found that Mr Price had not explained the potential downside to fixing for a longer period, nor the implications for the calculation of redemption penalties of a longer fixed term. Further, Mr Price’s failure to disabuse Mr Thomas when he asked whether the maximum likely redemption penalty was in the range of £10-20,000 gave rise to a misrepresentation which influenced the decision to enter into the first fixed loan.

This case supports the view that there may be a mezzanine duty to explain financial products which goes beyond the Hedley Byrne duty not to mislead. The decision seems to be at odds with the High Court decisions in Green and Rowley v. RBS and Thornbridge v. Barclays Bank, although it may be distinguished by the drafting of the contractual documents and the reference by the bank to the BBC. A further decision clarifying the position may be necessary.